THE CURIOUS INVESTOR DAVID ROEDER droeder@suntimes.com April 6, 2012 8:36PM
All things considered, it’s a tense time at Chicago’s financial exchanges. They have their issues with reputation management.
The troubles at CME Group (CME), owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, are well known by now and involve missing customer money and potential fraud at the brokerage MF Global.
No one has accused CME of doing anything wrong, although there are victimized traders who will go to their graves insisting the CME, as MF Global’s lead regulator, had lax standards for the large trading customer. CME is a for-profit company and a market police officer, and regulators wonder if those roles are in conflict.
But at the Chicago Board Options Exchange, there’s regulatory smoke that could be more serious. The exchange, the main unit of CBOE Holdings (CBOE), admitted in February that the Securities and Exchange Commission is investigating its market oversight. Since then, two top executives in its regulatory division have departed and a shake-up has started.
On Friday, Dow Jones Newswires reported the CBOE has advised member firms it is conducting its own probe of “apparent violations” of trading rules going back three years. The CBOE declined to comment on the report.
The CBOE’s issues are serious because the SEC has been investigating market access. Regulators want to know if high-frequency trading firms and the exchanges that serve them collude in any way so that their orders are entered and executed ahead of others. In a letter to member firms announcing its own probe, the CBOE said it’s examining rules about how orders are prioritized and allocated, especially for its biggest business, the S&P 500 options complex, Dow Jones reported.
SPINNING KRAFT: It’s good that analysts don’t have to concern themselves with aesthetics in a financial deal, such as Kraft Foods (KFT) splitting itself up. Otherwise, how could they get past Kraft’s decision to rename one of the post-spinoff enterprises Mondelez International, a name baked in Market Research Hell?
But getting past that is what Joe Cornell of Chicago-based Spin-Off Advisors did, and he likes the terms of this deal, which Kraft has said it wants to complete by year-end. He thinks the two parts of Kraft are worth $43.50 a share. The stock currently stands at $38.04, so Cornell sees a 14 percent upside.
GRIPES ON GROUPON: Bashing Groupon (GRPN) is getting too easy, but the company just invites more of it. Earnings restatements have become par for the course at Groupon and each one only shows the company losing more money. Chicago’s tech entrepreneurs must be worried that they’ll all be tainted by the venture of Andrew Mason and Eric Lefkofsky.
But for new insight, I must defer to commentary posted last week by Jeff Bailey at Ycharts and John Shinal at MarketWatch.
Bailey observed how Groupon, with its nearly 11,500 employees, is an extraordinarily labor-intensive operation. With an annual revenue rate of $172,000 per employee, Groupon compares with the old-economy stalwart R.R. Donnelley and Sons (RRD), while Google records revenue per employee of $1 million, Bailey said. Shinal said Groupon is looking like the Pets.com of the latest tech craze. He said its greatest success has been to stage sales to pre-IPO investors that allowed Mason, Lefkofsky and their venture-capital backers to cash out handsomely “while creating no value for common shareholders.”
Consider, as well, the insider-trading suit a Groupon shareholder filed in Chicago that alleged Chief Financial Officer Jason Child and Chief Accounting Officer Joseph Del Preto together sold $4 million in shares ahead of the latest earnings restatement. GRPN went public last November at $20 and now stands at $14.18. See a pattern here?
CLOSING QUOTE: “We have 52 percent of the deposits held in five financial institutions. That’s a much greater concentration than we had before the crisis. There’s plenty of liquidity out there and the economy is growing. This is a better time to deal with too big to fail and to pare back the potential for damage by these large institutions in terms of systemic risk.” — Richard Fisher, president, Federal Reserve Bank in Dallas, on CNBC